This article is going to look at CVS Caremark Corp (CVS) through the lens of FAST Graphs™ fundamentals analyzer software tool. The 12-year historical chart on CVS Caremark Corp shows that the company is undervalued. The prudent investor seeking growth and a rising income stream might want to look more in-depth at CVS Caremark Corp for possible addition to his own portfolio.

Earnings Determine Market Price: The following earnings and price-correlated FAST Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Earnings & Price-Correlated Fundamentals-at-a-Glance

A quick glance at the historical earnings and price-correlated FAST Graphs™ on CVS Caremark Corp shows a picture of undervaluation based upon the historical earnings growth rate of 13.8% and a current P/E of 14. Analysts are forecasting the earnings growth to continue at about 13.4%, and when you look at the forecasting graph below, the stock appears undervalued (it’s inside of the value corridor of the five orange lines based on future growth).

The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 11.1% capital appreciation (green circle), long-term shareholders of CVS Caremark Corp, assuming an initial investment of $1,000, would have received an additional $199.60 in dividends (blue highlighting) that increased their total return from 11.1% to 11.7% per annum versus 3.5% (red circle) in the S&P 500.

The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current P/E ratio on this quality company is as low as it has been since 2002.

A further indication of valuation can be seen by examining a company’s current P/S ratio relative to its historical P/S ratio. The current P/S ratio for CVS Caremark Corp is .48 which is historically low.

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 23 leading analysts reporting to Capital IQ forecast CVS Caremark Corp’s long-term earnings growth at 13.4% (orange circle). CVS Caremark Corp has low long-term debt at 20% of capital. CVS Caremark Corp is currently trading at a P/E of 14, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, based upon forecasted earnings growth of 13.4%, CVS Caremark Corp’s share price would $93.76 at the end of 2018 (brown circle on EYE Chart), which would represent a 16.1% annual rate of total return which includes dividends paid (yellow highlighting).

Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in CVS Caremark Corp to an equal investment in 10-year Treasury bonds illustrates that CVS Caremark Corp’s expected earnings would be 7.5 (purple circle) times that of the 10-year T-bond interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclosure: No position at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment adviser as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC.
Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.